BioStem Technologies, Inc. (BSEM) Earnings Call Transcript & Summary

Let's kick off. I'm Denis Kelleher, Vice President of Morgan Stanley. Happy to be hosting BioStem. With us today is Jason Matuszewski, CEO. Before we dive in, I just want to note for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. With that, let's get started.

Thanks for being here, Jason. With some investors maybe not at the speed on the company, can you spend the first minute or two, just giving us a quick overview of the company and your core technology.

Sure. So first and foremost, thank you, Denis , for having us here. Really appreciate first opportunity to speak at the Morgan Stanley Global Healthcare Conference. So great opportunity. So BioStem Technologies. So we are a profitable med tech company focused in advanced wound care. Our core technology is BioREtain. It's a proprietary technology that we process placental-based tissue allografts for the advanced wound care space, specifically looking at treating diabetic foot ulcers, pressure ulcers and venous leg ulcers. This patient population is roughly about 7 million Medicare beneficiaries and a total market of about $11.3 billion in the advanced wound care space.

Great. What is the BioREtain process exactly? And how would you compare it to alternatives in the market?

Yes. I think it's definitely differentiated. We published some real-world data so far on the BioREtain process. We actually retain a large portion of the natural elements of the tissue, including the extracellular matrix, some of the growth factors and cytokines that are naturally found in placental-based tissue. And as I mentioned earlier, our real-world data has demonstrated that we -- with the BioREtain process, these allografts have supported less number of applications to close a wound as well as less time to close a wound.

Can you help us understand how you think about the addressable market today with the existing portfolio and how that could expand over time as product you developed?

Yes. I think right now, that's -- call it, the wound biologics TAM is roughly about $11.3 billion in the advanced wound care space. I think when we look at other areas of focus for BioStem, we're looking at areas like hospital outpatient, surgical, OR suites and things of that area where we could actually focus on leveraging our core technology of BioREtain to those areas as well as looking at synergistic M&A opportunities to target those areas as well.

Help us understand the clinical data portfolio of the company, kind of key highlights from the clinical trial data set at this point?

Yes. So right now, we're actively running three RCTs. We just finished enrollment in our first DFU study, roughly 72 patients enrolled across 10 sites. We're looking to report out data on that DFU study later this year. And then we're also enrolling patients in two additional studies, one in the VLU or venous leg ulcer space, same number of sites, roughly about 10 and similar patient population size, about roughly 60 patients. And then a secondary DFU study on our amnion, our BRAM trial, which is just solely focusing on the amnion layer of the placenta, similar size trial, roughly 60 patients across 10 sites. The last two trials, we're aiming to get readouts kind of the mid to -- beginning of mid to next year on those two trials.

Great. I guess pivoting to the partnership with Venture Medical. It's been a key driver for the business. Can you help us understand kind of just at a high level what the partnership brings and how we should think about the partnership on a go-forward basis?

Yes. I think the partnership has been instrumental in our growth, definitely a story from '22 to '24, '23 was roughly about $16.9 million top line revenue, '24 over $300 million. So we entered into that partnership with Venture Medical in late '23. The partnership really represented both their recognition of our BioREtain process and the product portfolio, and they really realize that this is a differentiated product line for the advanced wound care market as well as when we saw in Ventures, they've developed a software platform called OneView. And we felt that, that was a really amazing platform to support providers, not only from a compliance perspective, but also from a cash flow management perspective on managing where claims are and how to appropriately process those claims and really help and support those providers, especially when we're talking about their core focus in the mobile wound care segment as well as physician office segment, those are areas where they're smaller groups, right? They're not institutionalized hospitals, large organizations where they have the infrastructure to support that cash flow management side of the business as well as the compliance side. So I think it was a really good synergistic opportunity between both groups. We kicked off with over 100 FTEs into the field on day 1. So the opportunity to really scale very quickly with the commercial team on day 1 was a great opportunity. They came over from an existing product line as well, placental-based tissue product line. So it was a quick study for their reps and their team to get out and go to work. And so kind of what's led to the success of late '23 and into '24 and what it is today.

Excellent. And as you think about your commercial strategy on a go-forward basis, what are kind of the puts and takes relative to going direct versus your distribution channel?

Yes. I mean I think, obviously, which we haven't really got to yet is some of the headwinds around reimbursement and some of those struggles, but -- or opportunities, I should say, coming forward. But I think when we look at the model with Venture Medical and the opportunity that we've had in an exclusive partnership to really capitalize on the mobile wound care segment, physician office segment, -- as we go into '26, I think some things may change in regards to how we look at commercializing the product. We are looking to internalize some of the commercial team on the core focus in hospital, OR and in the federal space, so VA/DOD. But I think the hybrid model where venture has really demonstrated their's acknowledge and success in the mobile wound care segment, we'll continue to leverage that partnership and continue to hopefully flourish.

Now a good segue to reimbursement. You've got proposed changes to CMS, OPPS fee schedule, which are published in mid-July for skin substitutes. So uncertainty around like the final pricing for the products, what will be the competitive landscape kind of look like moving forward? And can you share just kind of your perspectives on what these changes mean for the short term and maybe medium term from a market opportunity perspective?

Yes. Sadly, we only have 27 minutes left. So it's a long topic for sure. It's somewhat contested. I mean there's a lot of changes potentially coming out. But I think ultimately, these are good changes, right? I think this administration, along with leadership at CMS and HHS and frankly, even in the medical community, KOLs in the space like Dr. Will Tettelbach and others have really kind of called out and said, look, there needs to be reform here. I think we have a runaway spend, specifically utilizing the ASP+6 methodology that products are being priced at in the physician office and mobile wound care space, which aren't really tied to kind of the payment structure that we find in HOPD and ASC, where it's a bucketed rate, right? And so this new OPPS and PFS physician fee schedule and outpatient physician fee schedule are trying to align those things. So we have a kind of [indiscernible] payment methodology for product across all sites of service and looking at kind of where we end up with specific placement reimbursement outside of product, it kind of gleans towards more of the traditional pass-through methodology that you've probably seen in the past. And I think it's going to hopefully normalize this industry. I know wound care has been a struggle on ever-changing dynamics around reimbursement. And I'm hopeful that ultimately, we see a normalization past '26. I do -- I am a little concerned about the low initial price that they propose about $125. I think that ends up being a challenge for mobile wound care providers to service patients that have -- are in underserved communities or rural areas where they don't have access to get into a clinic and need that mobile wound care provider to get out to them and treat their wound. And so I'm hopeful that we see a price increase from that $125 number, and we'll be actively commenting through the comment process. I think it ends on the 12th, so near term here and hopeful to see what the outcome is in November as well on the final price for effective Jan 1, '26.

And Jason, as that process kind of moves forward, can you help us think through milestones such as clinical data where you could have kind of more visibility for reimbursement that could come into effect at that time?

Yes. I mean I think for us, it's -- we're in a unique position, right? Because we do have clinical data coming out back half of this year. I think that will help substantiate our differentiation in the marketplace and say to folks, hey, we are a leader in this space, right? We're committed to this space. We're committed to investing in the clinical trials to demonstrate superiority of our product. And I'm hopeful that kind of driving that clinical data along with other initiatives that it creates more of a long-term initiative for our organization. So...

Great. I guess pivoting to the business in the first half of 2025, you reported $1.8 million in revenue, which is up 5% year-on-year. Can you break down kind of the growth drivers in terms of expanding accounts, driving higher utilization with your existing users?

Yes, a combination of both. I think we saw some good utilization within the existing accounts. And frankly, looking to expand into areas geographically. Venture Medical is kind of core to the West Coast, west of the Mississippi, and we're looking to target some of the East marketplace for these products and really trying to partner with really more sophisticated long-term partnership as we kind of bridge from this ASP+6 methodology into the new methodology and really looking for mobile wound care providers, specifically on the Venture side as well as physician office folks that want to be here long term and would be great partners that really value the technology and value -- how BioREtain supports their patients in closing wounds. And so we're kind of looking forward to kind of seeing where that growth goes and continues to grow. I think there's other opportunities for us, specifically from a growth driver perspective that come where maybe M&A opportunities come along or other areas to diversify into other segments, like I alluded to earlier in the hospital outpatient and the OR space.

As you think about your current product suite and some of the selling points that are most attractive to the clinical community, could you kind of walk through some of those?

Sorry, can you ask...

Yes. So some of the selling points of the products that are most attractive to the clinical community.

Yes. I mean, obviously, the BioREtain process is definitely very attractive to them. I think what they've seen at least initially on the real-world data is like I kind of alluded to earlier about less number of applications and quicker time to heal on very hard-to-heal wounds. That's very attractive to providers that really want to utilize a product that's going to get some of these hard-to-heal wounds. I think even frankly, it's great to hear testimonials from providers that say, "Hey, I've been using a synthetic product or another competitor product. I've been trying to treat this patient. We're going on 12 months, 18 months. We still have not gotten this wound closed. And we were able to use your product in three or four applications to get the wound closed, right? It's extremely satisfying and gratifying in a way, right, to hear that. And so yes, so it's cool.

Yes. It seems like if you have those kind of referenceable proof points with the next center and kind of gift that keeps giving.

Yes. And I think I hope going forward, at least with the readout of the RCT, that will also be more of a validating point, right? Some of these real-world data sets or real data patients aren't as compliant as when you're running a clinical trial, right? So getting a patient to be compliant is some of the biggest challenge in wound care, right, getting a patient to come in, offload, do some of the things that are necessary for a proper blood flow and making sure that they're not continuing to propagate a wound. When you're in a more rigorous clinical trial, it's a lot easier to kind of hold some of those variables a little closer. So...

And that's even for the DFU and the VLU?

Yes. Yes, absolutely, absolutely.

Interesting. So I guess stepping back, can you think -- can you help us think through the growth trajectory over the next few years for the company?

I think, obviously, going into '26, we'll kind of have a reset based on the framework of reimbursement. But I think that will also lend itself to really get some clarity around what does growth look like over the next 4 to 6 years. I think for us, we'll continue to kind of drive adoption of our existing BioREtain platform in the mobile wound care space, hospital outpatient space. Look to start getting involved on to GPO agreements, IDN agreements into the hospital setting and look at other sites of service within -- or frankly, call points within the hospital system, not so focused in chronic wound, but more gravitating to some of the acute wound space as well. I think there's a lot of M&A opportunities within this space as well. I think values are suppressed and some really nice targets that will kind of expand what I always say is the continuum of care, areas where we don't have a product that touches a patient across that value stream and where we are currently kind of at the end of that continuum of care where all these other products didn't work on that patient, and we're a product of last resort. It would be great to have an opportunity to expand our product portfolio and be able to service a patient on day 1 and hopefully on day wound closure.

Really exciting. How would you evaluate where you are at from a market share perspective now and then where you expect that to go over time?

Yes. No, it's a great question. I mean, as I kind of alluded to, it's $10.3 billion. It's a very large market. We delivered just over $300 million last year. So somewhat small and de minimis, I guess, in the overall market opportunity. But I think, like I said, we'll see how things suss out moving forward from '26 and how that changes not only the TAM, but also who's left and who's interested in being a long-term player in this space. We'll continue to try to drive the BioREtain message. And as I alluded to, getting into the hospital and things of that share hopefully drives that as well.

I guess like if you look at it like slightly differently, how many relevant accounts are out there? And how do you expect to kind of incrementally penetrate those accounts over time, recognizing the backdrop is...

Yes, yes. Yes, it's -- I think ultimately, as I kind of alluded to, too, there's roughly about 7 million Medicare patients out there with a chronic wound. And so that number is growing exponentially as well. So the problem isn't going away. I think when we look at how many patients we ultimately are not currently addressing right now just due to the market dynamics of high ASP products and other things, I think there's still a decent amount of market opportunity in the mobile wound care and physician office segment as well as kind of a greenfield for us because we're not in the hospital yet, and we know that market is pretty sizable based on the success that some of our peers are having. So I think there's a lot of upside for us in a lot of areas.

I guess shifting to the financial profile, specifically gross margins. They're obviously very strong at around 95%. Can you help us better understand the manufacturing process and the pricing strategy that helps you drive that type of margin?

Yes. I think it screams why BioREtain is superior, right? Not only from a superior product on retaining a lot of the natural properties, but also the fact that it's a very efficient process to manufacture. We look at competitors and kind of evaluate how do they actually process that material, and it's taking them anywhere between 8 to 10 hours to process that material. We've been able to develop a process to manufacture that product within some 3.5, 4 hours, so almost half the time. At the same time, we're using the method in which to retain a lot more of the natural properties. So not only are we maximizing efficiencies on the manufacturing side, but also it lends itself to a better clinical product. So pretty cool.

Really exciting. And then moving down to operating margins, those are kind of in the low double digits. Can you talk about the path forward around the operating infrastructure in terms of investments you'll need to make to continue supporting on one hand, the clinical evidence information and on the other hand, the commercial growth?

Yes. I think the operating margins continue to kind of be in these low double-digit numbers, at least kind of going forward as we invest in clinical infrastructure, manufacturing infrastructure for scale as we kind of go forward. Hopefully, as kind of those things kind of run their course, we can hopefully create some efficiencies there. I think when I look at also EBITDA margin and some of the sales and marketing as a percent of revenue, I think when we get past the end of '25 and go into '26, there will be an opportunity to also improve some of the efficiencies there as well. And that's kind of why we're really excited to see how things kind of pan out in '26 as there's some -- I think there's some efficiencies there that we can pick up as well and frankly, be -- a little bit more similar to our peers in some of those percentages and whatnot.

It sounds like it translates into fair bit of operating leverage in the P&L? I think you hit this earlier, but just to kind of maybe double click on the types of M&A opportunities that are coming your way and how you might look to allocate company resources achieve inorganic growth?

Yes. Yes, I think there's -- like I kind of alluded to earlier, I think there's definitely some opportunities in areas that -- I think there's orgs and product portfolios out there that really aren't large enough for the larger folks like a Smith+Nephew or Zimmer or Mölnlycke to take on. And they're also too close in synergy to the existing peers. And so because we are lacking access into the hospital and the OR and things of that nature, I think there's some really good opportunities there where we can pick up products frankly, people, other organizations that help us accelerate our opportunity just like Venture did when they showed up and showed up with 100 FTEs in the field in '23. We're able to kind of lock a load and go forward and commercialize very quickly. I think there's other opportunities in areas that we don't service now that we can do something very similar.

And how does it commercially look like if you're looking at targets and you're thinking about chronic versus acute wounds? Is that a different call?

No, absolutely. Yes, I think it is. And I think to also kind of expand on your question or point there is, when we look at things that we're looking at things that are positive revenue generation, positive EBIT generation, so not really a size project or anything like that, something that's more mature and definitely has a good footing that we can add capital to and resources to and really grow it from there.

I guess as you look out, there's obviously some exciting readouts with DFU and VLU. Does that change your approach commercially as those kind of come on the market?

Yes, I believe so. I mean I think we'll see where the coverage policy goes. We have this looming also local coverage determination that we'll see how that impacts what clinical data is going to be required to effectuate being on the covered versus noncovered list. When CMS ultimately pushed the LCD back to January 1, to '26. One of the things they mentioned was, hey, organizations please submit data for your products in November -- by November. And so we're actively going to work towards that. And I think expanding on how do we get access in more commercial payers or, frankly, just better product adoption due to the fact that providers see the clinical value of these products. I think -- the other side of that coin too is the fact that when we move away from ASP+6 methodology and get more to a normalized pricing structure there'll be more on selling on efficacy and product adoption around efficacy and the science versus economics, hopefully.

And I guess on that note, there was -- the Journal of Wound Care had an interesting article recently kind of addressing policy framework for skin substitutes. Just curious if you had a chance to dig it in and what the implications might be. I know you touched about the [ $125 ] earlier, sustainable rate.

Yes. I think JWC and Dr. Tettelbach and that group did a great job of really coming through the CMS data, right, and saying, okay, hey, are there things that we need to be looking at? Is there anomalies in the fact that are we -- no pun intended turning the baby out with the bathwater here in the sense of are there a subset of providers that are overutilizing these products are how many other providers are utilizing these products? And are we getting better adoption, meaning more patients are getting treated? Or is there just overutilization by maybe bad actors and things of that nature. And I think that paper really highlighted the fact that there's a significant amount of adoption of these products by the top 100 providers that are utilizing these products. Also, I think it was fascinating the fact that like there is a significant delta between DFU and diabetic foot ulcers and venous leg ulcers on how much product you need to treat those patients. One thing that is also fascinating that isn't really covered by the LCD is the fact that pressure ulcers were left out of the LCD. And so I kind of scratch my head and go, okay, well, why is that, right? And kind of look through some of these things and realize, wait a minute, there is no clinical data for treating pressure ulcers by these products. And so maybe that was the driving factor around that. And so Will and his team, I think, did a great job on putting together a good summary around what does it take to be successful in utilizing skin substitutes in the mobile wound care space in the physician office space. What does that number really need to be from a reimbursement perspective? Do we need to normalize placement rates across all sites of service so that we don't have an artificial drive to one service or the other if we're going to normalize pricing across all sites of service? And -- it's a good read. I wish everybody would take a time to take to read it because it's a very easy one. And I think it [ erase ] it out very nicely as to kind of what are the hot buttons in this industry, but also what are the pretty -- I feel like tangible solutions that could be -- that could solve a lot of the hopeful -- the fraud abuse and some of the other issues.

Great to have you, here Jason.

Yes no problem.

Thanks so much.

Yes. Thank you.